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Retirement Planning > Retirement Investing > Annuity Investing

The annuity suitability process

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Most advisors would agree that a fixed annuity can be an integral part of a sustainable income plan in retirement. Yet selling fixed annuities come with myriad regulations.

Increasingly, to handle those risks, general agencies, field marking organizations and broker-dealers have instituted suitability measures in the interest of consumer protection and overall due diligence.

In a recent interview, Alex Holloman III, director of suitability at Athene Annuity & Life Assurance Company, right, shared his insights on annuity suitability best practices.

Suitability defined

LHP: This term “suitability” is used a lot. In plain English, can you define it?

Alex Holloman: Broadly speaking, “suitability” describes the steps taken by an agent and an insurance company to reasonably ensure that the annuity being recommended appropriately addresses a client’s insurance needs and financial objectives at the time of the sale.

The process is based on the needs and financial information provided by the client and governed by standards and supervisory procedures developed by the insurance company. The client is an integral part of this process. Both the client and the agent must have a reasonable basis for believing the recommendation is suitable.

The 2010 Suitability in Annuity Transactions Model Regulation, which has been adopted by 27 states, sets standards and procedures for suitable annuity recommendations and requires insurers to establish a supervisory system. Other states have adopted previous or similar versions of this regulation.

Common concerns and red flags

LHP: Would you describe some common suitability concerns that a given insurer would be mindful of or tend to be viewed as red flags?

Holloman: The Model Regulation puts forth 12 points that all insurance companies are responsible for monitoring. Carriers are directed by the Model Regulation to obtain 12 specific types of suitability information. Generally this information falls into three categories:

  1. Financial profile and situation
  2. Objectives
  3. Financial resources

Red flags may include limited savings, lack of investment experience, and situations where the purchase would require a significant portion of a client’s assets.

Another potential red flag focuses on the source of funds in a particular circumstance surrounding the replacement of existing insurance or annuity contracts.

Replacements and portfolio reviews

LHP: Do consumers or trustees ever replace annuities to adapt to changing circumstances, preferences or financial market changes?

Holloman: Yes, consumers do replace annuities to fit their goals. Situations may arise where the product they purchased is not capable of meeting their future needs.

According to data from LIMRA, 25 percent of the policies issued involve the replacement of an existing contract. In replacement situations, companies may look at the following factors, among other items:

  • Surrender charges
  • Death/income benefits (liquidity)
  • MVA (market-value adjustment)
  • Replacements in the past 36 months
  • Issue date of the contract being replaced

A carrier that decides to accept a replacement with one or more of these potential issues should review to ensure that there is a tangible net benefit from the transaction to the consumer.

LHP: Can you elaborate and give an example situation an agent might often see?

Holloman: Say a client age 68 purchased an annuity in 2012 and it has nine years of surrender charges remaining and the product has an annuitization benefit tied to it. The financial situation of the client has changed and now they are considering replacing their current contract with a 10-year income benefit annuity. Due to the high surrender charges on the current contract and the recent history of purchase, this replacement transaction might not be a suitable recommendation.

Role of marketers, FMOS, distributors and general agencies

LHP: Any suggestions for intermediaries wishing to install a checks-and-balances system to circumvent problems when transacting annuity business, as well as processing and submitting to insurers?

Holloman: Invest in training your staff on the suitability procedures of the companies you represent. Develop relationships with the suitability department of these carriers and ask if they have a pre-suitability process. Although the producer and client may feel the sale is suitable, the company may have a different opinion. Not every case submitted is suitable.

A pre-suitability procedure can prevent the producer from writing an annuity that may eventually get declined.

Last but not least, make sure that the writing producer is properly trained on the product and meets the state training requirements prior to taking the application

Section 7A of the Model Regulation requires that the producer have adequate product-specific training, including compliance with the insurer’s standards for completion of this product training prior to soliciting an annuity sale.

In addition, 7B requires producers take a general annuity training course offered by an insurance-department-approved education provider.

Case outline and the cover letter

LHP: In life underwriting and sometimes long- term care, a cover letter is encouraged by underwriting departments and general agencies to “paint a picture” of the client during the preliminary application process. Can an agent do the same for annuities to help resolve or address suitability concerns and best represent the consumer/client?

Holloman: Certainly. In addition to company-required forms, including suitability forms, any additional information that would help the company understand why the sale is suitable will most likely be accepted to assist the company in its suitability determination. These letters should be individually tailored to the client and his or her current situation.

Insurance companies expect producers and registered representatives selling its products to determine the appropriateness of each recommended fixed annuity purchase and/or replacement according to industry guidelines prior to submitting an application.

Many states have adopted one of the NAIC (National Association of Insurance Commissioners) suitability model regulations; for example, the NAIC Senior Protection in Annuity Transactions and the 2010 NAIC Suitability in Annuity Transactions.

Other state regulators require a producer to have reasonable grounds for believing that their recommendations are suitable for the consumer. These recommendations are based on the facts disclosed by the consumer and the producer at the time of transacting annuity business.

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